Jan 16, 2005—Many companies looking to meet mandates from Metro, Target, Tesco, Wal-Mart and other major retailers are discovering that integrating RFID into supply chain management is no easy task. It requires product innovation from vendors of tags and readers, and significant process innovation from users if they are to see any benefit from their newfound abilities to collect and analyze data. And there needs to be a positive feedback loop between product and process innovations, with each step forward by either half of the equation spurring the other half to improve still more.

Determining how best to manage the product and process innovations that RFID makes possible, and in some cases demands, requires a solid theory of innovation. “Theory” for many managers is a dreaded word. But a good theory can explain causal relationships, which helps managers to not only predict but control the outcomes that interest them.

What emerges from a theory-based analysis of RFID is that for some companies, no matter how tumultuous the changes required to incorporate RFID into their business, there’s little to be concerned about: Established processes for incorporating innovation will do just fine. For others, however, RFID represents the kind of secular change that could reorder the industry leaders, depriving powerful incumbents of much-needed growth and perhaps even undermining their business altogether. Worse still, who needs to worry and who doesn’t is likely to be the inverse of what many analysts and commentators have suggested.

The reason for this topsy-turvy world is that RFID is “merely” a technological breakthrough. Innovations of any type realize their true value only when embedded in specific business models. And it turns out that RFID has many different applications. Some simply make it possible to do better the very things companies have been trying to do all along. But some promise change of an entirely different sort. Understanding the differences, and what to do about them, is critical to the success of both users and vendors of RFID technology.

Disruption theory has proved a powerful way to understand the effects of an innovation on a market. The theory is based on a distinction between sustaining and disruptive innovations, each of which has very different characteristics that, in turn, have profound implications on how best to implement and commercialize that innovation. The process of disruption is summarized in the chart below.

In every market there is a rate of improvement that a company’s customers can utilize or absorb, represented by the dotted line sloping gently upward across the chart. There is, of course, a distribution of customers around this central tendency. Customers in the most demanding tiers may never be satisfied by the best products or services available, and those in the least demanding tiers may find that comparatively low levels of performance are more than they need.

There’s a distinctly different trajectory of improvement that innovating companies provide as they introduce new and improved products. This pace of technological progress almost always outstrips the willingness of customers in any given tier of the market to pay for it, as the more steeply sloping solid lines in the chart suggest.

The reason is that companies must win over new, and typically more demanding, customers to grow faster than the growth in consumption of their existing customers. And so companies work hard to improve their products faster than their existing customers can absorb those improvements in order to catch up with the needs of the more demanding tiers of the market.